EBA Guidelines on Advanced Measurement Approach (AMA

30 Pages·2012·0.55 MB·English

EBA Guidelines
on
Advanced Measurement Approach (AMA) -
Extensions and Changes
(GL 45)

London, 6 January 2012
Contents

I. Executive Summary ........................................................................ 3
II. Background and rationale .............................................................. 5
III. EBA Guidelines on Advanced Measurement Approach (AMA) -
Extensions and Changes (GL 45) .................................................... 7
Title I - Subject matter and scope ....................................................... 9
Title II- Requirements regarding AMA extensions and changes ................ 9
Title III- Final Provisions and Implementation ..................................... 12
Annex 1 – Criteria for classification of extensions and changes into,
significant, major and minor changes ................................................. 13
IV. Accompanying documents ............................................................ 15
Cost- Benefit Analysis / Impact Assessment........................................ 15
Feedback on the public consultation and on the opinion of the BSG ....... 18
V. Form for Confirmation, on the part of Competent Authorities, of
Compliance with these Guidelines ............................................... 29

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I. Executive Summary
1. Article 105(1) of Directive 2006/48/EC and Article 20(1) of
Directive 2006/49/EC allow credit institutions and investment firms
(hereinafter, ‘institution(s)’) to use Advanced Measurement Approaches
(‘AMA’), based on their internal risk models to determine the regulatory capital
charge for operational risk, provided these internal models are expressly
approved by the competent authorities.
2. An AMA should, at all times, be tailored to the specific characteristics of
the institution, so that its actual operational risk profile is effectively covered.
Therefore institutions need to review, change and may extend the AMA as
appropriate.
3. The present Guidelines provide institutions with guidance on how to
communicate AMA extensions and changes to the competent authorities and on
how to define internal policies for AMA extensions and changes (AMA Change
Policy) in line with supervisory expectations. The Guidelines deal only with the
process for the approval of, or communication with, competent authorities
regarding AMA extensions and changes. The Guidelines do not contain
requirements regarding the modelling or risk management of institutions.
According to these Guidelines, changes have to be categorised according to
their materiality as ‘significant’, ‘major’ or ‘minor’ changes. This classification is
important because, while for extensions and significant changes prior approval
by the competent authorities is a requirement under these Guidelines, major
and minor changes need only to be notified to them. Supervisors will review the
AMA change policies and ultimately either approve (in the case of extensions
and significant changes) or object to (in the case of major and minor changes)
any proposed change or extension. The Annex to these Guidelines elaborates
on the criteria for the classification of extensions and changes in the different
categories mentioned above.
4. On 15 December 2010 the predecessor organisation of the EBA, the
Committee of European Banking Supervisors (CEBS), submitted the draft
Guidelines on AMA changes for public consultation until 15 March 2011. Five
responses were received1. In addition, a public hearing was held on
23 February 2011 at the European Banking Authority’s (EBA) premises in
London, to allow interested parties to share their views with the EBA.2
5. Overall, participants at the public hearing and respondents to the public
consultation were supportive of the proposed Guidelines on AMA changes and
appreciated that the Guidelines clarify the requirements of communication of
AMA changes and/or extensions to competent authorities and that they also
clarify relevant supervisory processes, as this facilitates the further
development of AMA models across the industry. They suggested that similar
Guidelines would be helpful for credit risk and market risk models as well. The

1 The public responses to CP45 are published on the EBA website together with the
consultation paper (CP 45).
2 A summary of the results of the public hearing has been published on the EBA website
together with the consultation paper (CP 45)
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main issue raised was that it would be beneficial to clarify the categories of
major and significant changes. It was also suggested that a definition of more
concrete quantitative criteria for distinguishing between major changes and
significant changes would be useful. These suggestions were partly taken into
account in the finalisation of these Guidelines. However, a common quantitative
threshold was not set. The implementation of this aspect will be reviewed by
the EBA and taken into account when binding technical standards on the
conditions for assessing the materiality of extensions and changes to the AMA
will be developed.
6. The EBA conducted a cost and benefit analysis, considering the costs for
institutions and competent authorities. The implementation of the Guidelines is
expected to trigger low one-off costs for AMA institutions and competent
authorities, especially as the Guidelines only affect a limited number of EU
banking groups and institutions using an Advanced Measurement Approach
(AMA) for the calculation of the capital requirements for operational risk. Clear
communication rules are expected to lead to a smoother process, avoiding
case-by-case decisions on the appropriateness of a process and reduce the cost
for home/host coordination of competent authorities regarding this matter.
Institutions will have more legal certainty about AMA changes being in line with
supervisory requirements. An impact on the economy of the EU or a single
member state is not expected. The costs of the Guidelines are not
unreasonable, as a more consistent treatment of AMA changes will be achieved
throughout the EU.
7. Competent authorities should undertake all steps to apply the EBA
Guidelines on the Advanced Measurement Approach (AMA) - Extensions and
changes by 6 March 2012, as mentioned in title III thereof.

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II. Background and rationale
1. Directive 2006/48/EC, Article 105states, in paragraph (1) that credit
institutions may use Advanced Measurement Approaches (‘AMA’) based on their
own operational risk measurement systems, provided that the relevant
competent authority expressly approves the use of the models concerned for
calculating the own funds requirement; in paragraph (2) it states that credit
institutions shall satisfy their competent authorities that they meet the
qualifying criteria set out in Annex X, Part 3 of the Directive.
2. The EBA issues these Guidelines in order to harmonise the
communication to -and treatment by- competent authorities of AMA extensions
and changes. The application of these Guidelines should also in practice assist
institutions in further developing their own AMA by clarifying the supervisory
expectations and processes.
3. More in particular, the present Guidelines provide institutions with
guidance on how to communicate AMA extensions and changes to the
competent authorities and on how to define internal policies for AMA changes in
line with supervisory expectations. The Guidelines rely on the established
administrative procedures and ‘technical’ channels for communication between
competent authorities and institutions. The means of communication are
therefore left to be defined by competent authorities.
4. An AMA extension is the introduction of new relevant AMA components
(e.g. use of insurance, expected loss deduction), or the implementation of the
AMA framework in parts of the group. Changes to an AMA comprise
modifications that are essential for meeting the regulatory requirements in the
area of operational risk management (Annex X, Part 3, Paragraphs. 2 and 5)
and measurement systems (Annex X, Part 3, paragraphs 8-31 of
Directive 2006/48/EC) and modifications with respect to internal governance
structure and procedures (Annex X, Part 3, paragraphs 2-7, Article 22 and
Annex V of Directive 2006/48/EC).
5. An AMA including the internal risk model and risk management and
control policies and procedures should, at all times, be tailored to the specific
characteristics of the institution, so that its actual operational risk profile is
effectively covered.
6. An institution is obliged to regularly review and, if necessary, to revise
the AMA in response to changes in internal or external factors, for example,
changes in its business activity or organisational structure, inclusion of
additional data in the model, risk assessment, validation and audit results
(Annex X, Part 3, paragraphs 5, 6 and 7 (a), in conjunction with
Art. 105 paragraphs 1 and 2 of Directive 2006/48/EC).
7. Extensions and some changes to the AMA can have a considerable
impact on the quality and reliability of the AMA and the institution’s capital
requirements at group and solo level; it is therefore necessary to involve the
competent authority prior to their implementation.
8. If requests to extend or significantly change the AMA are submitted by
an EU parent credit institution or jointly by the subsidiaries of an EU parent
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financial holding company, competent authorities will follow the procedures
envisaged by Art. 129 paragraph 2 of Directive 2006/48/EC. The responsibility
for organising and coordinating the approval process for extensions and
significant changes to the AMA are with the consolidating supervisor.
9. Changes to the AMA and to the quantitative methods used can be of
differing degree of importance, or materiality, depending on the individual AMA.
Depending on the materiality of an actual change (i.e. depending on whether
this change constitutes an extension or a significant change, or a major or
minor change ), different requirements for communication with the competent
authorities are provided by these Guidelines.
10. Minor changes are those changes which may occur more often, but
which do not have a severe impact on the reliability of the AMA framework or
the capital charge. However, such changes also need to meet the requirements
set out in Annex X, Part 3 of Directive 2006/48/EC. Further, a per se
insignificant change, in conjunction with other changes, might have a significant
impact and, in such cases, needs to be considered accordingly.
11. While extensions and significant changes require prior approval, major
and minor changes need to be notified to the competent authority. Different
processes were chosen to reduce the number of approval processes needed and
the connected costs and to allow institutions to adopt smaller changes in a
timely manner. Institutions need to document the internal procedures and
responsibilities for extensions and changes in an AMA change policy.
12. The Annex to these Guidelines elaborates on the criteria for the
classification of extensions and changes in the different categories mentioned
above. The criteria that an institution provides for in its AMA Change Policy are
expected to be broader than those outlined in the Annex, taking into account
the institution’s individual AMA particularities. Given the young and evolutionary
nature of operational risk as a risk discipline, this was deemed the preferred
approach, given that banks combine the required elements contained within the
AMA framework, in a large variety of ways.
13. On 20 July 2011, the European Commission (EC) adopted legislative
proposals, with the view to strengthening the regulation of the banking sector.
These proposals contain a requirement for the EBA to develop draft regulatory
technical standards to specify the conditions for assessing the materiality of
extensions and changes to the AMA. According to this proposal, the EBA shall
submit the draft regulatory technical standard to the Commission by
31 December 2013.
14. The implementation of the Guidelines and the experience gained by
assessing model changes according to these Guidelines will be beneficial for
developing the future draft regulatory technical standard.

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III. EBA Guidelines on Advanced Measurement
Approach (AMA) - Extensions and Changes
(GL 45)
Status of the Guidelines
1. This document contains guidelines issued under Article 16 of Regulation (EU)
No 1093/2010 of the European Parliament and of the Council of 24 November
2010 establishing a European Supervisory Authority (European Banking
Authority), amending Decision No 716/2009/EC and repealing Commission
Decision 2009/78/EC (EBA Regulation). In accordance with Article 16(3) of the
EBA Regulation, competent authorities and financial market participants must
make every effort to comply with the guidelines.
2. Guidelines set out EBA’s view of appropriate supervisory practices within the
European System of Financial Supervision or of how Union law should be
applied in a particular area. EBA therefore expects all competent authorities
and financial market participants to whom guidelines apply to comply with
guidelines unless otherwise stated. Competent authorities to whom guidelines
apply should comply by incorporating them into their supervisory practices (e.g.
by amending their legal framework or their supervisory rules and/or guidance
or supervisory processes), including where particular guidelines within the
document are directed primarily at institutions.
Reporting Requirements
3. Competent authorities must notify EBA whether they comply or intend to
comply with these guidelines, or with reasons for non-compliance, by
6 March 2012. Notifications should be sent by submitting the form provided in
Section V of the present document to [email protected]. Notifications
should be submitted by persons authorized to notify EBA on behalf of their
competent authorities. Please note that other methods of communication of this
confirmation of compliance, such as, communication to a different e-mail
address from the above, or by e-mail that does not contain the required form,
shall not be accepted as valid.
4. The notification of competent authorities mentioned in the previous
paragraph shall be published on the EBA website, as per article 16 of EBA
Regulation.

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In between the text of the Guidelines that follows, further explanations on
specific aspects of the guidelines are occasionally provided, which either offer
examples or provide the rationale behind a provision. Where this is the case,
this explanatory text appears in a framed text box.

Contents

Title I - Subject matter and scope ......................................................... 9
Subject matter .................................................................................. 9
Scope and level of application ............................................................. 9
Title II- Requirements regarding AMA extensions and changes ............ 9
AMA Change Policy ............................................................................ 9
Categories of changes to the AMA according to their materiality ............ 10
Submission of the AMA Change Policy ................................................ 10
Supervisory procedures for extensions and significant changes ............. 11
Supervisory procedures for major changes ......................................... 11
Supervisory procedures for minor changes ......................................... 12
Title III- Final Provisions and Implementation .................................... 12
Transitional provisions ..................................................................... 12
Date of application .......................................................................... 12
Annex 1 – Criteria for classification of extensions and changes into,
significant, major and minor changes .................................................. 13
A) Extensions to the AMA framework ................................................. 13
B) Significant changes to the AMA ..................................................... 13
C) Major changes to the AMA ............................................................ 14
D) Minor changes to the AMA ............................................................ 14

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Title I - Subject matter and scope
Article 1
Subject matter
These Guidelines harmonise practices and procedures for the internal
practices of institutions and for the supervisory treatment of extensions
and changes to an Advanced Measurement Approach (‘AMA’) used for
determining the regulatory capital charge for operational risk.

Article 2
Scope and level of application
These Guidelines apply to competent authorities and institutions using an
AMA for the purpose of calculating the capital requirement for operational
risk and, if the AMA is used on a unified basis, to the EU parent credit
institution or the EU parent financial holding company.

Title II- Requirements regarding AMA extensions and changes
Article 3
AMA Change Policy
1. An institution shall approve at the appropriate hierarchy level, and shall
implement, internal policies for AMA extensions and changes (AMA Change
Policy), including procedures and responsibilities for the internal approval
of AMA extensions and changes, taking into account its organisational
characteristics and AMA specificities.
2. Within an AMA Change Policy, the institution shall document its principles
and procedures for classifying and processing planned AMA extensions and
changes. This shall include appropriate criteria for the classification of
possible changes and the internal processes and responsibilities for
implementing and documenting AMA extensions and changes.
3. The classification of planned AMA extensions and changes shall be made
into the four categories described below (under article 4). The basic
criteria for the classification of planned AMA extensions and changes are
elaborated in the Annex to these Guidelines. Nevertheless, institutions
shall include in their AMA change policy only the criteria which are
applicable to their specific AMA, and shall develop further criteria than
those described in the Annex, taking into account the particularities
applying to their AMA.
4. Further, the AMA Change Policy shall provide for an internal or external
independent review of planned extensions or significant changes.
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5. The institution shall re-examine and adjust the AMA Change Policy to
reflect changes within its internal governance or AMA framework as
appropriate.
6. The AMA Change Policy and its application shall be subject to regular
independent review.

Article 4
Categories of changes to the AMA according to their materiality
1. The AMA Change Policy shall use the following categories of extensions
and changes:
a. Extensions;
b. Significant changes;
c. Major changes; and
d. Minor changes.
2. The classification of any intended change shall not be considered in
isolation but it shall instead be assessed in connection with other changes
that have been made previously, that are intended to take effect at the
same time, or changes that are already planned for the future.
3. The categories and to the extent applicable to each institution the
classification criteria of the different types of changes mentioned above
shall be integrated in the internal AMA Change Policy. The institution shall
add further details to the AMA Change Policy consistent with the
characteristics of the institution’s internal governance and AMA
framework.
4. In cases where the classification of a change based on the actual
quantitative impact on the regulatory capital and the classification of the
same change based on qualitative criteria are different, institutions shall
classify the relevant change in the category of higher materiality.
5. Irrespective of the criteria provided for the classification of possible
changes in an institution’s AMA Change Policy, competent authorities
retain the right to reclassify the materiality of an actual AMA change and
apply the respective supervisory procedures according to these Guidelines.

Article 5
Submission of the AMA Change Policy
1. The institution or, if the AMA is used on a unified basis, the EU parent
credit institution or the EU parent financial company, shall submit its AMA
Change Policy and any subsequent modification to the competent
authority.
2. Institutions applying to use an AMA shall also submit to competent
authorities an AMA Change Policy as part of the required documentation.
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